Bitcoin Surges Past $47,000, And Institutional Investors May Not Be Far Behind

Bitcoin open interest at the Chicago-based Chicago Mercantile Exchange, worth approximately $2.7 billion, is surging just as bitcoin and the broader crypto market is starting to break free from its short-term paralysis around $40,000. On the back of a weekend surge, it is now higher than $47,000.

Open interest at the exchange is up 28% over the last two weeks and is now just 2% below the strong level seen at the end of 2021. This is a major reversal from the 58% drop ($7.0 billion-$3.0 billion peak) that occurred following bitcoin hitting an all-time high just shy of $70,000 in November.

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Since October 2021, as many as 38 large long-bitcoin traders were priced out of the market after the SEC started approving futures ETFs, but nine of these large bitcoin traders, such as hedge funds, returned these past two weeks. There are now 47 such entities, which is significant because their long sentiment is highly correlated to the bitcoin-US dollar price.

However, there are still reasons for caution. While this type of movement would normally signify a bull run, the CME has always traditionally been seen as an institutional bellwether for crypto the debut of the futures ETFs, the Proshares Bitcoin Strategy ETF (BITO) in particular, distorted what was previously an efficient and even-sided market and muddied the waters.

For example, the number of large bitcoin sellers this year (53) is higher than those of buyers (BITO and the other ETFs can take the sides of multiple trades), suggesting that the bitcoin rally still faces some resistance from more potential buyers. In October, the number of large buyers was 75 but has steadily decreased to 38 in the time since.

Let’s explore this further. ETF shares issued by these asset managers were required to hold (and also to roll month after month) approximately $1.4 billion worth of CME BTC futures contracts as collateral for their shares. This sudden, large CME bitcoin futures demand, however, upset the prevailing balance at the time between bitcoin buyers and sellers. The number of buyer and seller contracts is always equal at the CME, but the number of large buyers and sellers varies.

It is not an exaggeration to state that the SEC-bitcoin ETF ‘solution’ introduced a major distortion to the supply and demand of a relatively even futures market and massively increased concentration around one long-only bitcoin fund (ProShares’ BITO) which may hold as much as 40% of all long-bitcoin positions and has more than $1.1 billion in bitcoin under management by itself. In fact, you can see the flip in the chart below, when asset managers (primarily BITO) dramatically increased their ‘buy rate’, hedge funds roughly maintained their number of short-bitcoin offer but switched counterparties: in with asset managers and out with long-bitcoin hedge funds, commercial traders, and retail traders.

To draw a parallel from the real estate market, asset managers gobbling up long bitcoin futures positions was akin to a small group of wealthy California buyers rolling into Phoenix, Arizona and purchasing 60% of its housing inventory within a month and outbidding up the competition every month thereafter until they were the main ones locking in most new houses that came to an overpriced market.

On the plus side, the long-only buy side positions of asset managers created a demand floor for bitcoin in the futures market and also furnished the CME Group with a steady transactional revenue source. The supply of selling interest for bitcoin futures comes from three dozen hedge funds, a healthy number of market participants.

If these firms wanted to hedge these bets they would then take out long positions in the spot market or perhaps on other less-regulated exchanges. In fact, data suggests that some of these traders may be going to Binance. For instance, while crypto exchanges offering bitcoin futures also suffered double digit drops in activity, though only two (Huobi, -75%; Kraken, -59%) more than CME Group, Binance only saw a modest -18% drop.